Contract modification refers to the agreed-upon changes made to the terms or conditions of an existing contract by all involved parties. These modifications require mutual consent and can address various aspects, such as scope, pricing, or timelines, ensuring the contract remains relevant and effective.
A contract modification is a change in the scope or price (or both) of a contract that is approved by the parties to the contract. A contract modification exists when the rights and obligations that are created or changed by a modification are enforceable. The Company accounts for a contract modification as a separate contract when the scope of the contract increases, and the price of the contract increases by an amount that reflects the standalone selling prices of the additional promised goods or services that are distinct. If a contract modification is not accounted for as a separate contract, the Company’s accounting of the contract modification depends on whether the remaining goods or services are distinct from those already provided on or before the date of the contract modification. If the remaining goods or services are distinct from those already provided, the Company accounts for the contract modification as a termination of the existing contract and creation of a new contract. The amount of the consideration to be allocated to the remaining performance obligations consists of the consideration promised by the customer that was included in the estimate of the transaction price for the existing contract and that had not been recognized as revenues and the consideration promised as part of the contract modification. If the remaining goods or services are not distinct from those already provided, the Company accounts for the contract modification as if it were part of the existing contract and accounts for the effect that the contract modification has on the transaction price, and on the measure of progress toward complete satisfaction of the performance obligation, as a cumulative catch-up adjustment at the date of the contract modification.
An entity shall account for the contract modification as if it were a termination of the existing contract, and the creation of a new contract, if the remaining goods or services are distinct from the goods or services transferred on or before the date of the contract modification.
Contract modifications that relate to additional goods or services that are not distinct from the goods or services already provided for under an existing contract are accounted for as part of an existing contract on a cumulative catch-up basis. Contract modifications that relate to additional goods or services that are distinct from the goods and services provided for under an existing contract are accounted for as a separate contract.
“Revenues for additional work resulting from a modification or an instruction received from the customer to make a change in the scope of work or the price, or both, will result in an increase in contract revenue. The Company does not account for contract modifications unless approved by the customer. In addition, the Company reviews the enforceability of changes to the rights and obligations in contract modifications.
An entity shall account for the contract modification as if it were a part of the existing contract if the remaining goods or services are not distinct and, therefore, form part of a single performance obligation that is partially satisfied at the date of the contract modification. The effect that the contract modification has on the transaction price, and on the entity’s measure of progress toward complete satisfaction of the performance obligation, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) at the date of the contract modification (that is, the adjustment to revenue is made on a cumulative catch-up basis).
The Company determined that the contract modification did not add any new services to the performance obligation to develop the AirToken Project. Therefore, an in accordance with ASC 606-10-25-13 (b), the Company will account for the contract modification as if it were a part of the existing contract that is partially satisfied at the date of the contract modification. The effect that the contract modification has on the transaction price, and on the Company’s measure of progress toward complete satisfaction of the performance obligation, will be recognized as an adjustment to revenue at the date of the contract modification (that is, the adjustment to revenue is made on a cumulative catch-up basis) which is deemed to have occurred in the quarter ended December 2017.
8 During the nine months ended October 26, 2019, the Company entered into a contract modification in the second quarter that increased revenue produced by a large customer program. As a result, the Company recognized $11.8 million of contract revenues for services performed in prior periods, $0.8 million of related performance-based compensation expense, and $1.0 million of stock-based compensation. On an after-tax basis, these items contributed approximately $7.3 million to net income, or $0.23 per common share diluted, for the nine months ended October 26, 2019. These amounts are excluded from the calculations of Non-GAAP Adjusted EBITDA, Non-GAAP Adjusted Net Income and Non-GAAP Adjusted Diluted Earnings per Common Share for the nine months ended October 26, 2019.
Under ASC 606-10-25-10, a contract modification is a change in the scope of a contract that is approved by the parties to the contract. Contract terminations (either partial or full) are also considered a form of contract modification under ASC 606. If the remaining goods and services to be provided after the contract modification are not distinct from those goods and services already provided and, therefore, form part of a single performance obligation that is partially satisfied at the date of modification, the entity should account for the contract modification as if it were part of the original contract. For these modifications, the entity adjusts revenue previously recognized, either up or down, to reflect the effect that the contract modification has on the transaction price and updates the measure of progress (i.e., the revenue adjustment is made on a cumulative catch-up basis). At the time of the notification of intent to terminate the Takeda Agreement provided by Takeda in January 2023, the Company assessed the remaining services to be provided during the termination period and concluded the estimated remaining services were not distinct from those provided prior to the contract modification and accounted for the modification as if it were part of the original contract. The notice of termination of the Discovery Program dated January 6, 2023, changed the scope of the Discovery Program performance obligation such that Takeda was not expecting, and the Company was not intending to, perform any additional activities beyond March 31, 2023, resulting in the acceleration of the remaining deferred revenue recorded on the Company’s financial statements.
Based on the Company’s accounting conclusion that the modification resulted in prospective accounting, the total deferred revenue did not change as a result of accounting for this contract modification.
A contract modification with a value of $6.7 million with an Office of the Inspector General for a large U.S. federal government department to continue to provide platform development services.
Contract modification refers to any change or alteration made to the terms of an existing contract. This can include changes to the scope, price, compensation, performance timelines, or any other conditions originally agreed upon by the contracting parties. Modifications can be made for various reasons, such as adapting to unforeseen circumstances or accommodating mutual agreements between the parties involved.
Contract modification should be used when all parties involved in a contract agree that changes are necessary to meet their needs or circumstances have evolved such that the original terms are no longer suitable. Common reasons include:
When writing a contract modification, it is critical to ensure clarity, legality, and mutual consent. Here are essential steps:
Example: “The section regarding delivery dates shall be amended to extend the deadline from July 30, 2023, to September 15, 2023, as mutually agreed upon by both parties.”
Contract modifications are applicable to various types of contracts across different industries, including but not limited to:
Such flexibility within contracts helps ensure ongoing relevance and fairness, accommodating the dynamic nature of business needs and external factors.
Try our AI contract analysis and extract important clauses and information from existing contracts.
< <
Dive deeper into the world of clauses and learn more about these other clauses that are used in real contracts.
A "Contract Year" is a defined term referring to a consecutive 12-month period starting on a specified date, often the effective date of a contract, and repeating annually throughout the contract's duration. It is used to structure time-based obligations, such as payments, performance milestones, or renewals, within the agreement.
A convalescence clause in a contract typically outlines the terms and conditions under which a party is entitled to take leave or receive benefits during a recovery period following an illness or medical treatment. This clause may specify the duration of the convalescence period, any necessary documentation, and the rights and obligations of both parties during this time.
A cooperation clause requires that all parties involved in a contract work together collaboratively and provide necessary support to each other to fulfill the terms and conditions of the agreement. This may include sharing information, resources, and assistance to ensure the successful completion of contractual obligations.
Fill out the form and we will get in touch with you to give you a personal, customized demo of fynk.
Greetings!
I'm Markus, co-founder of fynk. After you've submitted the form, I'll swiftly get in touch with you.
Also, right after you submit your details, you can pick a time that works best for you for our meeting.
